In its earth-shattering decision in Citizens United v. Federal Elections Commission, which recognized the right of corporations to participate in election politics, the US Supreme Court suggested that corporate democracy might provide a solution to those who disagreed with its decision. The Court wrote:
Shareholder objections raised through the procedures of corporate democracy can be more effective today because modern technology makes disclosures rapid and informative. A campaign finance system that pairs corporate independent expenditures with effective disclosure has not existed before today. It must be noted, furthermore, that many of Congress' findings in passing [legislation that restricted corporate expenditures] were premised on a system without adequate disclosure ... With the advent of the Internet, prompt disclosure of expenditures can provide shareholders and citizens with the information needed to hold corporations and elected officials accountable for their positions and supporters. Shareholders can determine whether their corporation's political speech advances the corporation's interest in making profits, and citizens can see whether elected officials are "in the pocket" of so-called moneyed interests.Efforts have begun to implement this concept. The most prominent initiatives include:
The last of these suggestions was the subject of a recent speech by Commissioner Luis Aguilar of the Securities and Exchange Commission (SEC). He said that shareholders want these disclosures and it is the mission of the SEC, as the investor's advocate, to require these disclosures.
- proposed legislation in California that would require corporations with California shareholders to disclose expenditures on political issues,
- bylaw amendments and resolutions proposed by shareholders that would require publicly held corporations to disclose their political expenditures, and
- a call for the SEC, through its rulemaking authority, to mandate corporate disclosure of political expenditures.
While the SEC clearly has the authority to require reporting companies to disclose information regarding their political expenditures, that may not be the wisest course of action for the commission to pursue. If it chooses the mandatory disclosure option, the commission will have to embark on a costly and long-term process to determine what should be disclosed and how and when disclosure should be made. If challenged, the SEC will have to demonstrate that the benefits of its new rule exceed its costs. Last year, the US Court of Appeals for the District of Columbia Circuit set aside an SEC rule on shareholder access to the proxy statement to nominate directors because the SEC failed to justify the rule on such a cost/benefit basis.
Crafting a new SEC disclosure rule on corporate expenditures will compete for resources within the SEC against the ongoing effort to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act and other projects. Congress saddled the SEC with numerous rulemaking tasks and the commission is already behind on many of them. Moreover, the Volker Rule, which limits the ability of banks to engage in proprietary trading and was recently proposed by the SEC, was met with a firestorm of criticism and may require considerable rethinking and reworking by the commission. It is a rule that can have significant economic effects and it is imperative that the commission get it right. On the rulemaking, legislative and enforcement fronts the SEC has more than a full plate of responsibilities. If there is a better way to handle disclosure of corporate political expenditures, the SEC should embrace it.
There is a better way. The commission should take note of the fact that the market is already addressing the issue. More than 50 percent of the S&P 100 companies already post their political expenditures on their websites. For the 2012 proxy season, shareholders groups and their political watchdog allies have crafted over 100 proposals that require publicly held companies to increase their political expenditure disclosures. Merely receiving such a proposal prompts many companies to adopt a disclosure policy.
Of course, this market-based approach has its shortcomings. Not all companies will embrace voluntary disclosure, and the nature, timing and presentation of disclosure will not be uniform from company to company. Some companies, having adopted voluntary disclosure, may abandon it in the future or reduce the amount they disclose. However, if having robust disclosure of political expenditures is material to investors, they can disinvest or decline to invest in companies that fail to meet their disclosure expectations. The Internet can be very effective in publicizing the identities of companies that fall short on the disclosure front or make political contributions that offend some segment of society.
The SEC can encourage this ongoing grassroots effort. It should assure that shareholder proposals related to political expenditures make their way into company proxy statements. Exchange Act Rule 14a-8 places some hurdles in that regard. However, under these rules, companies can exclude shareholder proposals that are not proper subjects for action by shareholders under state law, that deal with the company's ordinary business operations or that are economically insignificant to the company's business. Depending on how a shareholder proposal is written, it may be excludable under one or more of these three rules. The SEC can and should amend its rules to make clear that shareholder proposals that deal with political expenditures are not excludable, or specify the circumstances under which they may be excluded.
Modifying Rule 14a-8 is simpler and more attainable than the project envisioned by Aguilar. Leaving the matter up to shareholder initiative has another salutary aspect. It may be the case that, in some companies, the shareholders will vote against mandating additional disclosure. Shareholders recognize that disclosure comes at a cost. Companies have to spend time and resources to assemble information, assure its accuracy and present it. In addition to these costs, a rational shareholder may assume that the company's political expenditures are unlikely to be material to the company and not worth the effort of tracking and disclosing. Finally, and perhaps most importantly, a rational shareholder may conclude that such expenditures are beneficial to the company while their disclosure may not be. Aguilar seems to assume that no shareholder could hold such a view, but that is an empirical question that an effective Rule 14a-8 could resolve.
Mark Loewenstein is the Monfort Professor of Law at the University of Colorado Law School. His research interests center on business associations, agency law and securities law, with a particular interest in corporate governance. Loewenstein served as a member of Colorado's Securities Board, and was an active member of the Colorado Bar Association's Corporate Law Revision Committee. He also served as a delegate to the ABA House of Delegates and remains an active member of the ABA's business law committee.
Suggested citation: Mark Loewenstein, Improving Corporate Campaign Finance Disclosure, JURIST - Forum, Mar. 9, 2012, http://jurist.org/forum/2012/03/mark-loewenstein-campaign-finance.php.
This article was prepared for publication by Michael Kalis, an assistant editor for JURIST's academic commentary service. Please direct any questions or comments to him at firstname.lastname@example.org